Strong stock market returns just weren't enough in 2014 to boost the funded status of the nation's largest corporate pension plans. Instead, a Towers Watson analysis found that they backslid substantially, losing much of what they had gained in 2013.
The analysis looked at pension plan data for the 411 Fortune 1000 companies that sponsor U.S. tax-qualified defined benefit pension plans and have a December fiscal-year-end date. Funded status for those plans by the end of 2014 had fallen 9 percentage points, costing plans nearly all their 2013 gains and leaving them funded at an aggregate of only 80 percent.
At the end of 2013, they were at 89 percent, compared with 77 percent at the end of 2012.
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It isn't that plan assets didn't rise in 2014. They did — by about 3 percent — from $1.36 trillion at year-end 2013 to an estimated level of $1.4 trillion.
That increase indicated that investment returns were in the neighborhood of 9 percent. Asset classes played a big role in just how high returns went, with large-cap U.S. equities gaining about 14 percent, countering a nearly 5 percent fall in international equities.
But companies contributed less to their plans, according to the analysis, an amount that came in at about $30 billion for the year. That's the lowest contribution level since 2008, and down 29 percent from 2013, Towers Watson found.
Other factors that weighed heavily on plans were falling interest rates, which increased liabilities, and new mortality tables showing people living longer.
As a result, plans overall ended up with more than double the pension deficit they had at the end of 2013, despite the rising stock market. At the end of 2014, that figure was $343 billion, reflecting a weakening in plan funding of $181 billion for the year.
"Despite a rising stock market in 2014, funding levels for employer-sponsored pension plans dropped back to what we experienced just after the financial crisis," Alan Glickstein, a senior retirement consultant at Towers Watson, said in a statement.
Those new mortality tables played a major role in the problem. According to Glickstein, "A one-time strengthening of mortality assumptions alone is responsible for about 40 percent of the increased deficit."
Another senior retirement consultant at Towers, Dave Suchsland, noted that 2014 was "another big year of pension derisking … with significant lump sum buyout and annuity purchase activity."
"Given the change in funded status, we expect many plan sponsors will need to re-evaluate their retirement plan strategies in 2015. … This year will most likely bring higher expense charges and unless there is an uptick in interest rates or equity market performance, eventually additional contribution requirements."
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